Securitized bond

Securitized bond Definition

Bonds, whose interest and principal payments are backed by the cash flows from a portfolio or pool of other assets, are called securitized bonds. Securitization allows for an organization (such as a bank) transfer risk from its own balance sheet to the debt capital markets through the sale of bonds.

For example, a mortgage bank might use the cash inflows on its current mortgage book, to issue bonds. The cash raised from the sale of these bonds would then be used to issue new mortgages. This process is cyclic allowing the mortgage bank to increase its operational leverage. This type of securitization is known as a mortgage backed security (MBS).